Shareholders, be careful what you wish for

SHAREHOLDERS in the American Century Global Natural Resources fund are getting what they wished for.

They might not want it.

American Century had asked shareholders to liquidate the fund. Global Natural Resources isn't a great fit in the company's lineup, and its assets of $35 million are too small to make it profitable.

Says company spokeswoman Deborah Larson, "We kind of believed investors had voted with their feet on this fund. The biggest it ever got to was about $50 million, and we felt it had never really grown into being a successful fund."

Shareholders felt differently, voting with their proxy ballots. In a stunner, shareholders defeated management, which announced the results Sept. 3.

"This is a miracle of democracy," says 50-year-old Hunter Greer, a shareholder from Aptos, Calif., who voted against liquidation.

"Shareholders normally are such sheep. I never expected anything like this."

Neither did anyone else.

In hindsight, shareholders might start wondering what they won.

The vote leaves American Century in control of a fund that it no longer wants to manage. That creates a conflict, because the easiest way for management to get what it wants - the end of the fund - is to post numbers so bad that shareholders give up.

Management has a fiduciary duty to keep managing the fund well, and no one is suggesting that it will do otherwise. But the situation puts an additional burden on management to turn in good numbers and prove itself.

"If anything changes now, it becomes pretty easy for a court to say that bad moves were made on purpose," says Larry Soderquist, director of the Vanderbilt University Corporate and Securities Law Institute. "So now management wants to be out of the fund, but they have to be exceedingly careful in how they handle this."

To its credit, American Century started the process trying to do the right thing, liquidating a small fund for which it had no logical merger partner. That's an honorable move, rather than trying to hold onto the assets by dumping them into a fund with a different investment objective.

What management clearly did not expect was stubborn, unyielding investors. Shareholders apparently liked Global Natural Resources' performance, slightly negative over the past three years but enough above average during that period to earn an above-average star rating from Morningstar. Investors might also have wanted to avoid the tax consequences of a liquidation, which is considered a sale and unlocks long-term gains investors have in the fund.

To get out of its pickle, American Century has several choices:

It can sell the fund, although shareholders would have to approve the deal and might not want a new manager any more than they wanted liquidation.

It can hold another proxy vote on liquidation, trying again on the premise that the first proxy was unclear and that the balloting had to be extended to achieve a quorum.

It can keep the fund open. But with an expense ratio of roughly 0.7 percent, management's fee on the fund is less than $250,000 a year, peanuts for any big firm and probably not enough to make the fund profitable. American Century has closed the fund to all but current shareholders, so it can't be expecting a flood of assets.

It can resign the fund, walking away from the money and leaving the fund's board of directors to find a new manager. Such an unusual move would not require shareholder approval, because management can't be held in the job against its will.

The firm is not discussing what's next.

Michael Lipper, president of Lipper Advisory Services, a New Jersey investment firm, says, "American Century is in a no-win position on this fund. We don't know yet what Plan B and Plan C are, but whatever the next move is, they will want to make it quickly."

Specialists generally advise investors facing a fund liquidation to get their money out of the fund rather than fight the process. Once management has no interest in keeping a fund open, shareholders have little reason to stick around.

Greer, who is sticking with the fund, says, "I've called and put in my two cents ... but I don't think anyone from a mutual fund ever listened to me, at least not until this vote. ... I got what I wanted, but we'll see how long that lasts."

Charles A. Jaffe is mutual funds columnist at The Boston Globe. He can be reached by e-mail at jaffe@globe.com or at The Boston Globe, Box 2378, Boston, Mass. 02107-2378.